Denny's Corporation

Gentlemen, you can then hold for today's DINI Corporation Q1 2021 Earnings Conference Call. At this time, we are still making additional participants and do plan to be available momentarily. We appreciate your patience and ask that you please remain on the line. © transcript Emily Beynon Good day and welcome to the Denny's Corporation Q1 2021 earnings conference call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Kurt Nichols, Vice President, Investor Relations and Financial Planning and Analysis. Please go ahead.

Thank you, Tony, and good afternoon, everyone. Thank you for joining us for Denny's first quarter 2021 earnings conference call. With me today for management are John Miller, Denny's Chief Executive Officer, Mark Wolfinger, Denny's President, and Robert Garofsky, Denny's Executive Vice President and Chief Financial Officer. Please refer to our website, investor.denny.com, to find our first quarter earnings press release, along with a reconciliation of any non-GAAP financial measures mentioned on the call today. This call is being webcast, and an archive of the webcast will be available on our website later today. John will begin today's call with a business update. Mark will improvise the comments of our restaurant capacities, our franchisees, and development. And Robert will provide a recap of our first quarter financial results and current trends. After that, we'll open it up for questions. Before we begin, let me remind you that in accordance with the Safe Harbor provisions of the Private Securities Litigation and Reform Act of 1995, The company knows that certain matters to be discussed by members of management during this call may constitute forward-living statements. Management urges caution in considering its current trends and any outlook on earnings provided during this call. Such statements are subject to risk, uncertainties, and other factors that may cause the actual performance of Denny's to be materially different from the performance indicated or implied by some statements. Our strengths and factors are set forth in the company's most recent annual report on Form 10-K for the year ended December 30, 2020, and in subsequent Forms 8-K and quarterly reports on Form 10-T. With that, I will now turn the call over to John Miller, Denny's Chief Executive Officer.

Thank you, Curt, and good afternoon, everyone. I hope each of you have remained safe and healthy since we last shared an update on Denny's. And while the first quarter started off with uncertainty about the pace of reopenings due to expanding vaccine deployment, easing of restrictions and federal stimulus, I'm happy to say that we are quickly approaching 2019 sales levels in April. I'm even more encouraged by the stickiness of our off-premise business as dining rooms have reopened. This is a testament to the hard work and dedication of our teams to balance near-term labor challenges welcoming guests back into our dining room safely, and still maintaining focus on growing our off-premise business. We remain focused on our four key guest-centric themes, reassurance, value, comfort, and convenience, and I'll now touch briefly on each. As guests return to our restaurants, it is more important than ever that we ensure the health and safety of our teams and guests. We are committed to reassuring our guests that these provide the safe dining experience by consistently executing our or enhance cleanliness and sanitation procedures at all consumer touchpoints. Our second area of focus is value. We understand that value comes in different forms and has a different meaning for each type of guest. We consider our value approach to be a comprehensive balance between price, abundance, convenience, and bundled value. Our third focus area is comfort. We strive to ensure that Denny's is a place where our guests feel welcome and valued. Whether dining with a large family or as a party of one, we believe our guests view the Denny's experience as a time to build connections in an environment that is both inviting and comfortable. This is reflected in our new bowls and melts, as well as our established heritage restaurant image, which received consistently positive guest feedback, largely due to its welcoming and relaxed feel. And additionally, even as we face hiring challenges, Our operations team continues to reinforce the critical need for comfort by reminding our entire system of the rules we live by, including the expectation that, number one, everyone is welcome to dine at Denny's. Number two, everyone is treated like our favorite guest. And number three, everyone is shown kindness and respect. And our final area of consumer focus is convenience. We believe guests will continue to expect technology to bring enhanced value to their dining experience. whether in our restaurants or through off-premise options like our well-established Denny's on-demand platform or our new virtual brands. We've been pleased with our ability to retain off-premise sales, which have been more than doubled since the start of the pandemic, even as dine-in transactions have evolved. Turning to virtual brands, I'm excited to say that we substantially completed our rollout of the Burger Den in April. This concept allows us to focus on one of our strengths, great burgers, with new varieties using ingredients already in our pantry. And during testing, we established a success criteria for sales, $650 per week per restaurant. Results during the test were encouraging and gave us the confidence to initiate a national rollout of the brand. Robert will give more specifics on the performance of these restaurants. However, these transactions are highly incremental and leverage underutilized labor to maximize kitchen efficiency. Our second Virgil concept, called the Meltdown, is a DoorDash-exclusive brand that features handcrafted sandwich melts with fresh ingredients and unique flavor combinations. While this brand is able to utilize approximately 70% of the items currently in our pantry, our innovative culinary team has crafted new, craveable products with premium ingredients, such as slow-smoked brisket burnt ends. Test results have been similarly encouraging for the meltdown, and over half of our domestic locations will be launching during the second quarter. In fact, we've already launched over 175 locations and an additional 175 expected to launch this week. These brands provide opportunities not only at dinner and late night to leverage underutilized labor and kitchen space, but we are also seeing a meaningful number of transactions during the week versus the weekend. In closing, we are simply delighted to see the return of guests to our dining rooms. We are still the place where people can come in, sit down, and connect with one another over great food, but also a place with a continued focus on the health and safety of our guests, employees, and suppliers. With sales approaching pre-pandemic levels, the launch of two new virtual brands, market share opportunities on the horizon, an extraordinary group of franchisees, and our exceptional Denny's team members. I'm very optimistic about the future of this brand. So with that, I'll turn the call over to Mark Wolfinger, Denny's president, to discuss more about our franchisees and development. Mark? Thank you, John. And I want to echo your comments about our outstanding Denny's team and franchise system. And I, too, look forward to what this brand can accomplish during the balance of this year. While we currently have 11 domestic restaurants that are temporarily closed, I'm very pleased to say that nearly all of our operating domestic restaurants have open dining rooms with an effective capacity of approximately 75 percent. This is very encouraging considering just two months ago we had only 70 percent of our domestic restaurants with open dining rooms and an effective capacity of approximately 45 percent. We experienced slight improvement in our 24-7 operations during the quarter, However, we still only have approximately one-third of our domestic franchise restaurants offering 24 hours a day, seven days a week. As John mentioned, we are facing labor availability challenges, and this is the primary headwind preventing franchisees from opening at late night. To assist our franchisees with the estimated 20,000 employees that need to be hired, we've engaged with a vendor that will enhance our online recruiting, allow them to post open positions on our career website in order to provide greater visibility to potential applicants. Additionally, we will be hosting a national hiring event in June. That's next month. We believe these staffing challenges are temporary, and we are confident in our ability to reestablish our historical position as America's 24-hour diner. Turning to development, franchisees opened three restaurants during the quarter, including two international restaurants. Additionally, franchisees closed four restaurants during the quarter, yielding a net decline of only one restaurant, bringing our total number of restaurants to 1,649 locations. This deceleration and net unit declines underscores the confidence and future opportunities our franchisees see within the brand. I would now like to take a few moments to update you on the health of our franchise system. With off-premise sales remaining strong even as dining rooms reopen, we are very pleased to see franchisee profitability continue to improve. In the month of April, over 80% of our domestic franchise restaurants exceeded the 70% of 2019 sales threshold required to cover both fixed and variable costs, and over 40% of the domestic system generated positive sales. We are also currently supporting our franchisees and their efforts to secure funding through the second round of PPP, and the restaurant revitalization funds. Franchisees representing approximately 98% of the domestic franchise restaurants have applied for the second round of PPC, and approximately 60% of those restaurants have received funding to date. Improving sales, additional federal stimulus available to franchisees, and the net decline of only one restaurant during the first quarter gives us confidence in our franchise system's ability to prevail and emerge on the other side of the pandemic more focused and driven than ever. We look forward to seeing this historic recovery unfold and returning to net restaurant growth in the future backed by our existing domestic and international development commitments, including over 75 commitments from our recently completed re-franchising strategy. Additionally, while we do not celebrate the disproportionate impact of closures to small chains and independent restaurants, we do believe it will present an opportunity to capture additional market share and convert vacated space into Denny's locations as we move through 2021 and beyond. We have a proven record of converting existing spaces into Denny's locations. In the last 10 years, approximately 60% of our openings have been conversions. These less capital-intensive opportunities provide enhanced ROIs for franchisees, and our experienced development teams is already assessing the landscape for future Denny's locations. I'll now turn the call to Robert Vrosic, Denny's Chief Financial Officer, to discuss the quarterly performance.